Ashwini Mehra, Senior Advisor, Duff & Phelps was featured in CII Communiqué – the monthly newsletter of the Confederation of Indian Industry. In the article, titled “IBC: A panacea for bad debts in India?” Ashwini discusses developments, regulatory issues, committee proposals and industry recommendations on the Insolvency and Bankruptcy Code. Read the complete article below.
IBC: A panacea for bad debts in India?
Even as the Insolvency and Bankruptcy Code (IBC) was completing its first year of existence last December, a stone was thrown amongst the pigeons with the promulgation of an ordinance restricting the promoters’ ability to bid for their stressed assets. Much has since been said, both for and against the measure. Arguments have ranged from the ordinance going against the preamble of the IBC, which stipulates the need to maximize value by making the assets available to the largest number of bidders, to suggesting that the ordinance was timely in preventing bids from those quarters which had failed to utilize the assets viably. Some also suggested a middle path of framing a differentiated set of bidding rules for promoters and others. It will, therefore, be in order to critique the IBC and anticipate the direction of its evolution from its present nascent stage.
“Capitalism without bankruptcy is like Catholicism without hell,” said Frank Borman, renowned astronaut and erstwhile chairman of a failed U.S. airline. As such, the institutions established by the state should promote freedom to start a business (entry), run the business (level playing field) and exit/discontinue the business. The reforms of the ’90s focused on freedom of entry (dismantling the license-quota raj) but in the beginning of this century the focus shifted to freedom of continuing business (e.g., the Competition Act). The third leg, specifically the freedom to exit, has now been provided in the shape of the IBC, which provides a mechanism to stressed businesses to resolve insolvency in an orderly manner.
All past efforts (read Sarfaesi, CDR, SDR, 5:25, S4A) in the direction of the third leg have fallen far short of expectations due to poor implementation and available legal loopholes for defaulters. According to the World Bank, the average time taken to complete the bankruptcy process in India is 4.3 years, whereas in Singapore, Finland and the United States it takes just 0.5 to 1.5 years. Also, the recovery percentage in India is as low as 26%, whereas in the developed world this ranges from 78% to 92%. India’s track record on the use and outcome of the bankruptcy procedure is the poorest amongst the BRICS nations (Brazil, Russia, India, China and South Africa).
The IBC seeks strict time-bound initiation of corrective action even at the stage of the very first default either to the banks (financial creditors) or to the business counterparties (operational creditors). By ensuring certainty and clarity on all aspects of the process, the IBC hopes to decrease time to resolution, achieve higher recoveries and, in the course of time, encourage lenders to agree to higher levels of debt financing.
The IBC seeks to consolidate scattered and unstructured jurisprudence on insolvency prevalent in various acts such as the Presidency-Towns Insolvency Act, 1909; SICA Act, 1985; LLP Act, 2008; and Companies Act, 2013. A committee formed under the chairmanship of the Secretary, Corporate Affairs performed a comprehensive review of the IBC, including cross-border insolvency, development and regulation of information utilities, and instances of insolvencies in group companies. The committee submitted its recommendations to the Government of India (GoI) on issues involving time-bound identification of a resolution agent (105 days), fees charged by insolvency professionals (IPs) and insolvency professional entities (IPEs), home owners as financial creditors, and treatment of already enforced personal guarantees. Committee recommendations aside, there is bound to be a whirlwind of judicial pronouncements on various interpretational issues, which should result in the development of a robust IBC jurisprudence in the days to come.
On the positive side, we are witnessing debtors now reconciling to the “creditor in control” scenario, with the Committee of Creditors (CoC) becoming all powerful in the resolution process. It is, therefore, incumbent on the CoC to be fair to all stakeholders in the stressed corporate. After all, a corporate is an amalgam of stakeholders, and its corporate governance norms are expected to maximize the value of its assets and balance the interests of all entities linked to the company. The IBC supports this by generally preferring resolution over liquidation.
The success of the IBC depends upon the alacrity with which the GoI, courts, tribunals (National Company Law Tribunal [NCLT], National Company Law Appellate Tribunal [NCLAT]) and the Insolvency and Bankruptcy Board of India (IBBI) respond to early-stage issues arising in their domain post-implementation. However, the role played by the debtors and the creditors during implementation will also be critical to the IBC’s success. At the center of it all is the IP. Today there are over 1,700 IPs certified by the IBBI, most with virtually no experience being in the “hot seat” of a resolution professional. They are expected to take all steps to keep the company as a going concern and display the utmost integrity, impartiality and independence in their day-to-day conduct. IPs must possess the skills and acumen to balance commercial reality with the legal requirements to preserve the entitlements of all stakeholders. What’s more, the proceedings must ensure that debtors are not given the opportunity to put the money in their trouser pockets and hand over their coat for distribution amongst creditors and other parties.
It seems that, for the first time, the GoI and Reserve Bank of India (RBI) are truly on the same page regarding the effective resolution of the problem of bad debts and improving overall financial discipline in the way business is conducted in India. A number of features of the IBC and the pronouncements of various high courts and supreme courts motivate us to look at this latest effort in a positive manner. The coming months will show us the early trends in actual resolutions under the IBC. As of March 2018, out of the approximately 750 Corporate Insolvency Resolution Process (CIRP) cases admitted by NCLT, judgements have come in a little over 100 cases, but 75% of these are for liquidation, which is the last option under the IBC. Hopefully, these early indicators pertain primarily to “gone” cases, and in the days to come the objectives of the IBC may be met substantially, if not fully. The IBC should prove to be a game changer in the interest of the Indian economy’s health and long-term growth. As Nelson Mandela said, “I never lose; I either win or I learn.” The jury is still out on the IBC even though the World Bank has acknowledged the effort very handsomely. Ideally, all involved entities implement the lessons they learn along the way for finally resolving the debilitating problem of non-performing assets and financial indiscipline facing the country.